Rodolfo Frederico

Y-Knot | Problem Solving

Preventing Vendors Collusion Risk

Competition
Strategy&&Competition
Procurement:
Procurement:
Strategy

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 Procurement: Strategy & Competition
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Preventing Vendors Collusion Risk

Introduction

Considering the huge number of tenders / RFQs Procurement departments use to conduct
on a daily basis, a question surges naturally:

Are our suppliers cooperating among themselves? This text purpose is enabling Global
Procurement staff to identify when and how they are colluding besides demonstrating some
techniques to lead them back to competition.

Firstly, it is important to note that all modern economies have a sort of legal apparatus to
avoid price agreements and other arrangements to reduce or eliminate the competition.
Thus, suppliers have incentive to collude but in a secret way.

Market Signs

Suppliers use to send market signs as a form to achieve the cooperation without breaking
any antitrust law. Usually, they use the media (mainly newspapers and TV) to advertise their
strategy to create cooperation through promotional campaigns and announcement of
investment plans or new pricing policies.

In the Petroleum Industry, the most famous case was the Exxon Price Watch, a global pricing
strategy based on the “meeting competition” price policy.

According to the Price Watch, Exxon is monitoring continuously the market, every time and
everywhere with the precision of tiger-eyes and so astute as a tiger to prompt respond to
market movements, guaranteeing to the customer always the lowest price. More than a
piece of marketing, the Price Watch was a credible promise and menace, which the major
role was to intimidate other competitors, demoting them of any pricing response or
intention to retaliate.

Note that some of your vendors are doing the same in the supplier market. In order to
increase the menace reliability, tactical movements are conducted under a “tit-for-tat”1
strategy, which means the retaliation of any “non-cooperative” movement by overcoming
the most aggressive offer and going backward to the original position when the competitor
backs to cooperate.

1
Tit-for-tat strategy is part of the Game Theory approach and can be discussed in another article.
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Meeting Competition

A common practice is a supplier announcement of a pricing policy of “meeting competition”

(also named as “Most Favorite Customer” clause). In this case, its competitors are not going
to undercut prices, since the first one made a public promise to compete aggressively by
offering to match any price cut. The announcement looks like an aggressive threat to
competitors, but in truth means a disincentive to the competition, because if each
competitor knows that a rival will immediately match its price, the willingness to offer a
lower bid simply evaporates. Instead of increasing the competition, the “meeting
competition” policy allows to raise the market price.

That is also a common practice in retail segments like super/hypermarkets. When

hypermarkets networks like Wal-Mart and Carrefour declare their promises of matching any
competitors’ offer, what they do in fact is to reduce the willingness to compete as well as
reduce the demand price-elasticity, since they build in the buyer’s mind the perception of a
good deal have already been reached.

Nevertheless, you can figure out how successful is this strategy when applied to naïve-eyes
of non-trained buyers. Under the image of an aggressive competitiveness, in fact, there is a
robust way to disincentive competition.

However, this policy is not a panacea for the sellers and two relevant aspects should be
observed:

a. The policy is often difficult to administrate. The announcer should have a low-cost solution
to determinate whether a competitor is practicing or not a lower price.
b. Meanwhile the administrative issues are not well addressed there is an eminent risk of angry
customers generating lawsuits.

Preventing Collusion

As we have discussed, suppliers could adopt policies to increase prices. What can a buyer
do to inhibit a conspiracy among suppliers from functioning successfully? A very interesting
approach is the combination of tough negotiating skills, straight communication and some
sort of Online Bidding tools (OLB), since e-catalogues to reverse auctions. They represent
a powerful set of instruments to make life more difficult for the members of conspiracy.

A well-trained buyer must work to change the game, looking forward to informational
asymmetry and the lowest reachable trustworthiness among suppliers.

Therefore, the buyer is able to:

a. Reduce feedback for suppliers, leading auctions with generic alias or simple rankings;
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b. Set a starting price as low as the inferred price agreement;

c. Announce previously the existence of a reservation price that bidders should match at least,
otherwise the contract will not be awarded. Please note that the reservation price should
not be informed to bidders;
d. Bundle recurring demands, increasing the attractiveness and the risk perception on the
expected cash flow represented by a customer contract. A long-term contract prevents a
market share arrangement. It will work as incentive to non-cooperation, encouraging the
price cutter to act in order to take the contract as a whole. Furthermore, there is no direct
opportunity of a cartel retaliation to the opportunist player;
e. Verify economies of scale and/or scope by adding an aggregate lot. This approach also
generates the opportunity to cease the conspiracy, allowing a second chance represented
by a lump-sum bid;
f. Sponsor and invite outsider players to play the role of disequilibria factor;
g. Create confusion among the members of the cartel. For example, in case of bid offered
repeatedly, the buyer could establish a contracting strategy to award the contract using
other attributes different from price, which will generate suspects about the reliability of
(innocent) company to which was awarded the contract. This atmosphere of suspicious can
lead the members of conspiracy to believe that their partners are breaking the agreement.
Once they have reached this conviction, the buyer is going to be successful in his/her
strategy; he/she has disseminated the seeds of discord, what is enough to break the fragile
conditions to collude.

This paper content reflects the author’s opinion and knowledge about the theme and does not
represent a Y-Knot |Problem Solving advice or recommendation to any specific case. In order to
deep dive into this matter, ask support from a Y-Knot Consultant.

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